Record Brazil Coffee Crop Cuts Costs for Starbucks: Commodities

By Marvin G. Perez and Patricia Laya -
Dec 4, 2012

Record coffee harvests in Brazil, the
biggest grower, are compounding a global glut of arabica used by
Starbucks Corp. (SBUX) and Dunkin’ Donuts Inc.

Brazilian farmers will reap 50.8 million bags in 2013, a
record for a so-called low-crop season, according to the median
of nine analyst estimates compiled by Bloomberg. The harvest
reached 55.9 million 60-kilogram (132-pound) bags in 2012, an
all-time high for a peak year. Output usually drops in alternate
years because of growing cycles. Prices may fall 12 percent to
$1.311 a pound by June 30, the average of 14 predictions shows.

Futures slumped about 50 percent since May 2011, as the
highest prices in 14 years spurred Brazilian farmers to boost
supply. Their exports jumped 54 percent to $8.7 billion in 2011.
The flood of beans has continued and stockpiles tracked by the
ICE Futures U.S. exchange are headed for the biggest annual gain
in more than a decade. Rising costs and concern that economies
are slowing encouraged roasters and consumers to favor cheaper
robusta beans.

“There’s a significant crop coming from Brazil if the
weather continues to be favorable,” said Claudio Oliveira, the
head of trading at Castlestone Management LLC in New York, which
manages about $500 million of assets. “Abundant supply is the
driving force in the market.”

Worst Performer

Futures fell 35 percent to $1.4835 this year, the biggest
retreat of the 24 commodities tracked by Standard & Poor’s GSCI
Spot Index, which climbed less than 0.1 percent. Most
agricultural products advanced this year, with records in corn
and soybeans as drought parched crops from Australia to Russia
to the U.S. The MSCI All-Country World Index of equities rose 11
percent. Treasuries returned 2.7 percent, a Bank of America
Corp. index shows.

Brazil had record harvests in two of the past three
seasons, almost doubling output in about a decade and now
accounting for 38 percent of global supply, U.S. Department of
Agriculture data show. About 72 percent of the country’s crop
was arabica this year and the rest robusta, typically used in
espressos.

Minas Gerais, Brazil’s top arabica-growing state, harvested
25.87 bags per hectare this year, up from 18.75 bags in 2004,
according to Conab, the government’s crop forecasting agency.
That’s adding to a global crop the USDA estimates will expand
7.5 percent to a record 147.9 million bags this season.

Frost Risks

Frost during Brazil’s winter in June and July may limit the
drop in prices, said Marco Antonio dos Santos, an agronomist
with Sao Paulo-based forecaster Somar Meteorologia. The last
severe frost to limit output was in 1994, when a low-season
harvest plunged 36 percent the following season, according to
data from the International Coffee Organization in London.

“A lot of the optimism about Brazil’s crop has pretty much
been factored in, and any weather disturbances could take off 3
to 4 million bags,” said James Cordier, the Tampa, Florida-based founder of Optionsellers.com, a Commodity Trading Advisor.

Economic stimulus by central banks and governments from
China to Europe to the U.S. also may revive global growth and
boost demand for all commodities, said Kona Haque, an analyst
with Macquarie Bank Ltd. in London. Some markets are already
expanding, including in Brazil itself, where consumption jumped
12 percent in the three years to 2011, ICO data show.

Arabica cost almost three times more than robusta by
September 2011, from a premium of about 39 percent in 2008.
That’s since narrowed to about 74 percent as roasters switched
blends to use the cheaper beans. Robusta traded on London’s NYSE
Liffe exchange rallied 3.7 percent to $1,877 a metric ton (85.1
cents a pound) this year.

Robusta Switch

Robusta will rise to 46 percent of global coffee demand
this year, from 40 percent in 2010, according to Volcafe.
Consumption of the cheaper bean will rise 6 percent to 66.6
million bags this season as arabica advances 1 percent to 78.6
million, the Winterthur, Switzerland-based company estimates.

The demand is encouraging more robusta supply, which
Volcafe predicts will exceed demand by 1.4 million bags in
2012-2013, led by gains from Vietnam and Indonesia. Arabica
output will surpass consumption by 6.3 million bags, Volcafe
estimates.

Hedge funds and other large speculators had their most
bearish bets on arabica since at least 2006 in the week ended
Nov. 20, U.S. Commodity Futures Trading Commission data show.
They have been wagering on lower prices in all but two weeks
since February.

OECD Estimate

The 34-member Organization for Economic Cooperation and
Development warned of the risk of a “major” global recession
on Nov. 27, and the International Monetary Fund has cuts 2013
global growth forecasts twice since July, to 3.6 percent. Growth
in coffee consumption will slow to 2 percent this year, from 4.5
percent in 2011, according to the USDA.

The 17-nation euro area tumbled back into recession last
quarter, and economists surveyed by Bloomberg expect Japan to do
the same this quarter. U.S. leaders have yet to resolve the so-called fiscal cliff of automatic taxes rises and spending cuts,
which the Congressional Budget Office has warned risks shrinking
the world’s biggest economy.

While that may be slowing growth in coffee consumption,
it’s also lowering prices. Starbucks, the world’s largest
coffee-shop owner, will have “significantly lower” costs at
the end of its fiscal year in September than at the start, Chief
Financial Officer Troy Alstead told analysts on a conference
call Nov. 1. The Seattle-based company expects to save $100
million this year from “favorable commodity costs,” he said.
Shares of the company advanced 11 percent this year.

Folgers Brand

J.M. Smucker Co. (SJM), the maker of the Folgers brand, expects
lower costs for commodities including coffee to be “favorable”
for earnings, CFO Mark R. Belgya told investors Nov. 16. The
Orrville, Ohio-based company will report an 18 percent gain in
net income to $541.8 million in its fiscal year ending in April,
the mean of eight analyst estimates compiled by Bloomberg show.
Shares of the company rose 14 percent this year.

More sales and lower commodity prices are helping
franchisees to be “more profitable than ever,” Nigel Travis,
Chief Executive Officer of Canton, Massachusetts-based Dunkin’
Brands Group Inc. (DNKN) told investors Oct. 25. The fast-food chain,
with more than 10,000 stores, sells about 1.5 billion cups of
coffee a year and buys only arabica.

“When you go back a few years, except for a few spikes in
the middle of last year, coffee likes to be between $1 and
$1.20,” said Michael Smith, the president of T&K Futures and
Options in Port St. Lucie, Florida. “We’re way above the mean
of where it’s supposed to be. I think it could come down to a $1
in the first quarter of next year.”